Provide capacity for recouping and repaying the debt

Editorial appearing in the Het Financieel Dagblad

Relief measures for peripheral euro countries such as Greece do not work because government debt in relation to the economy is too high: debt servicing expenditure is growing faster than income from taxes.

Imposing higher taxes, cutting back public sector salaries and pensions reduce the economy, while the debt remains the same size. The timely restructuring of debts (write down) to reflect repayment capacity is unavoidable if a larger crisis is to be avoided. Peripheral countries were granted loans because they were viewed as part of the European Union, with a bailout if problems became too big. Government debt securities form part of the public money supply, the euro. If the value of these debt securities or the ability to pay the interest on these securities becomes doubtful, the euro itself is at stake. A debt is only repaid or rolled over as long as earning or repayment capacity is sufficient. The debt grows slowly but definitely faster than the economy until confidence is broken.

Devaluation makes labour cheaper and boosts export; it puts pressure on imports and stimulates the search for local alternatives, thus strengthening the local economy. However, the old game in which the local currency is devalued no longer works in the euro zone. That option in lagging countries in the euro zone is replaced by a negative spiral. That spiral consists of ever increasing government debt, rising interest in relation to income tax revenue, a shrinking economy and the flight of capital from local banks due to the prevailing fear of bankruptcy, meaning that these banks are no longer able to lend money. The recession spiral persists until there is a final implosion or revolution.

To inject more money (debt) into peripheral countries no longer helps. The effect at best is an exchange of private debt for public debt. The debt becomes even greater and ultimately ends in a huge explosion and bankruptcy. Interventions in public sector salaries and pensions do not strengthen the export position very much. Indeed, the failure to reduce labour costs in the private sector results in cheaper products for export. Furthermore, even if peripheral countries were to be expelled from the euro, their euro debt would remain and the debt would grow relatively speaking. In the event of an exit, those countries would opt for full bankruptcy, and thus for write down, with painful consequences for our banks and pension funds.

Another result of such a development is the collapse of exports to those countries. That represents a double blow to our prosperity. Prosperity that we actually financed ourselves for years in order to be able to continue to export. Looking for a stay of execution is no solution. A write down of the debts down to the repayment capacity is essential and unavoidable.